Vietnam increases rates to fight highest inflation in 28 months

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Vietnam intensified efforts to tackle the highest inflation since 2008, saying interest rates will rise in May for the second time in a month.

The refinancing rate will be boosted to 14 percent from 13 percent, effective May 1, the State Bank of Vietnam said Friday, adding to increases in February, March and April 1. The central bank said it will also raise the discount rate to 13 percent from 12 percent on the same date. It left the repurchase rate unchanged at 13 percent.

Vietnam's government has cut the target for credit growth and ordered a tighter monetary policy as it strives to restrain price gains and stabilize the nation's currency. Officials in April capped rates payable on dollar deposits, helping spur the dong to its best week since at least 1997 on optimism demand for the higher-yielding currency will increase.

"I think the question is not so much now how much they tighten, but how long they tighten," said Jonathan Pincus, a Ho Chi Minh City-based economist with the Vietnam Program at the Harvard Kennedy School. "If they are willing to endure the political pressure -- the pressure from business and consumers, who are inconvenienced by higher interest rates -- for a long enough period of time, then inflation will abate."

The currency gained 1.8 percent this week to 20,550 per dollar as of 5 p.m. in Hanoi Friday, according to prices from banks compiled by Bloomberg. That's the biggest weekly rise since at least March 1997. The dong was devalued for the fourth time in 15 months on Feb. 11 to try and curb Vietnam's trade deficit, risking higher import costs.

Shares rise

The VN Index, the benchmark measure of the Ho Chi Minh City Stock Exchange, rose 1.5 percent to 480.08 Friday, the highest level since March 11.

The State Bank of Vietnam said it will also raise to 14 percent from 13 percent the overnight rate for interbank electronic payments. The rate on loans to finance short balances in clearing transactions between the central bank and commercial banks will also rise to 14 percent from 13 percent, it said.

The central bank boosted its refinancing and repurchase rates on April 1 and will lift reserve ratios for dollar deposits in May, joining Asian counterparts from Thailand to China in extending the fight against inflation this year. It capped rates on dollar deposits at 3 percent for individuals and 1 percent for non-credit institutions from April 13.

Inflation surged to a 28-month high of 17.51 percent in April, stoked by increases in fuel and electricity prices. Gross domestic product rose 5.43 percent in the three months through March from a year earlier, slowing from a 7.34 percent pace in the fourth quarter of 2010.

Market rates

Alan Pham, chief economist at VinaCapital Investment Management Ltd. in Ho Chi Minh City, said he expects the refinancing rate to be raised again to 15 percent in the second quarter since it still lags behind market interest rates.

Credit growth was 5.05 percent in the first four months of the year, Nguyen Dong Tien, the central bank's deputy governor, said Friday. Money supply has risen 1.5 percent since the start of 2011, he said.

"At that pace, controlling credit growth is an issue that requires continued, cautious management," Tien said.

The monetary authority also said it will stop commercial banks from lending in gold and restrict deposits of the precious metal from May 1. The move is designed to reduce "dollarization" in the economy and prevent the use of gold as a payment tool, it said.

Premier's shift

Prime Minister Nguyen Tan Dung said in February that he aims to curb credit growth to less than 20 percent this year from an earlier target of 23 percent. He also intends to narrow the budget deficit to below 5 percent of GDP and cap the jump in money supply at 15 percent to 16 percent in 2011.

Lending growth is likely to decelerate under currently "high" interest rates, Standard & Poor's said in April. Higher rates are also aimed at boosting returns on dong deposits to ease pressure on the currency, whose weakness has increased the cost of imported goods, Credit Suisse Group AG (CSGN) has said.

"Vietnam's policy rates lag rather than lead the market," said Christian de Guzman, a Singapore-based assistant vice president at Moody's Investors Service. "Until these rates are jacked up even more to bring them into line with market rates, they won't be as effective as they could be as a guide to gauging Vietnam's monetary policy stance."

The central bank said on March 1 that it will use the refinancing rate and open-market operations interest rate, combined with other unspecified monetary policy tools, to manage market borrowing costs. The repurchase rate is also known as the open-market operations rate.

The base rate, which has been held at 9 percent since November, is "ineffective and no longer the policy rate," according to JPMorgan Chase & Co. (JPM)

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